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13 July 2011
In Omak Maritime Ltd v Mamola Challenger Shipping Co  EWHC 2026, the charterers argued that a London Maritime Arbitrators Association tribunal had erred as a matter of law in awarding damages to the shipowners despite the fact that they had suffered no loss, and so had ignored a fundamental principle in English law that damages are intended to be compensatory.
The owners of the Mamola Challenger chartered the vessel for five years. The charterers in turn entered into a charter arrangement with sub-charterers. This arrangement was put in place to enable the venture to comply with domestic Nigerian regulations and to obtain the necessary governmental authorisation. In the event, such authorisation was refused and the charterers then unlawfully terminated the charter with the owners.
Prior to termination, the owners had modified the vessel and incurred expenses relating to the installation of a crane. The market rate for the vessel was more than the charter rate at the date of termination. Over the five-year term for which the charterparty would have run, the owners concluded a number of short-term fixtures and earned more from these fixtures than they would have earned under the charterparty. The excess was greater than the amount of wasted expenditures in installing an additional crane.
This notwithstanding, the owners sought to recover from the charterers the costs of installing the additional crane. The charterers declined to reimburse the expenses incurred and the matter was referred to arbitration. The tribunal held that the owners were entitled to recover their wasted expenses, which it was held had no residual benefit to the owners, and awarded them the sum of $86,534.
The charterers appealed on the grounds that the owners had suffered no loss by reason of the charterers' breach. They further argued that to award the owners any sum in damages would breach the long-upheld principle in English law that damages are designed to be compensatory and not to put the innocent party in a better position than it would have been in had the contract been performed.
The judge, Justice Teare, allowed the appeal and set aside the award. Furthermore, he undertook an interesting review of the distinction between reliance and expectation losses, and addressed the question as to whether both types of loss are governed by the same compensatory principle of damages.
Expectation losses are also known as the loss of the bargain to the innocent party. Expectation losses can be difficult to quantify, especially where the net profits are low or impossible to prove. In such cases the innocent party might wish to claim that the losses it has suffered due to its reliance that the contract entered into would be performed. Such losses are typically for expenses incurred in preparation of the contract which are then rendered wasted or futile as a result of the breach.
Leading academics advocate that the two types of loss are distinct heads of claim under English law. It is said that damages awarded on a reliance basis are intended to put the innocent party in the position it would have been had no contract been performed; while damages awarded for expectation losses are designed to put the innocent party in the position it would have been in had the contract been performed.
The judge disagreed with this distinction and also disagreed with the view that the two bases of loss are alternatives to be pursued at the discretion of the innocent party. He concluded that reliance losses are simply a species of expectation loss and do not arise on a different judicial basis. As such, the judge held that the compensatory principle of damages applies to both types of loss. Thus, the court must make a comparison between the innocent party's position and what it would have been had the contract been performed. The innocent party is not entitled to recover damages that would place it in a better position than if the contract had been performed.
Since in this case the owners would earn more from the fixtures after termination than they would have earned under the charterparty, and the excess was greater than the amount of wasted expenditures in installing an additional crane, the judge held that the owners were not entitled to any damages for the wasted expenditure.
This decision is important since it seeks to clarify an area of law which has been vexing lawyers, academics and the judiciary - not to mention the commercial world - for some time. Its effect will be felt on a widespread basis and has the benefit of both simplifying and making clear the basis on which losses are to be recovered.
Be it in shipbuilding contracts or in other transactions which are often terminated in times of market volatility, this clarification of the law is likely to be of benefit to both the innocent and the defaulting party. As a consequence, affirmation of this decision by a higher court will doubtless be greeted with some relief.
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